Vital Signs: JobKeeper delivered what was needed to save the patient

Posted on October 17, 2021 by particularkev

Richard Holden, UNSWTo the critics, the Treasury has just marked “its own homework”.

It has produced a 60-page report entitled Insights from the first six months of JobKeeper.

And it finds the A$89 billion program it designed and delivered held up pretty well last year at the time Australia needed it most.

As with the Labor government’s economic rescue programs during the global financial crisis, there are critics claiming it was wasteful, this time from the Labor side of politics.

But they’ve exceedingly short memories.

In the first week of March 2020, Australia had 93 COVID-19 cases and three deaths.

The prime minister said he was “going to the footy” and “looking forward to it”, at a time when medical experts were calling for people to do no such thing and a quarter of Italy was locked down.

Italian tourists were coming in freely. We were sleepwalking into a calamity.

The way we were

On March 10 last year, I wrote that we needed to close our international border totally and immediately, and spend about $100 billion to support workers and business while we shut down the economy and got health measures in place.

On March 20 the borders were closed. Treasury forecast that if we had to lock down as hard as Italy or Spain our economy (GDP) would collapse by 24%.

That wouldn’t be a mere recession or even a depression. It would be economic and financial Armageddon. The government needed to plug an unimaginable hole quickly. And it did.

JobKeeper provided six months of financial support to businesses who expected their revenues to drop. At the time, that was almost every business in the country.

It was designed to be easy to understand, and to get money onto business and household balance sheets immediately.

Most importantly, it was designed to give recipients certainty in a time of calamitous uncertainty.

These are facts. They are undisputed.

What the critics say now

From the safety of the present day, critics point out that JobKeeper excluded certain industries and workers: short-term casuals and universities among them.

And they say $19.7 billion went to businesses whose revenues increased in the three months they received the payment.

It would have been better, they say, not to spend the money on businesses that turned out to have rising revenues, and it would have been good to include short-term casuals and universities.

JobKeeper should have included a “clawback” provision, they say.

They are right. It would have been better had it been designed in that way. But they are taking insufficient account of what things were like at the time.

What things were like then

The context for the development of JobKeeper was a once-in-a-century event, with a government in power whose entire political brand had been railing against “debt and deficits”.

Economists were concerned the government might do too little, or nothing at all.

There are the three things worth noting:

Treasury had to act incredibly quickly, in a matter of days. I like an academic seminar as much as the next person, but Treasury didn’t have the luxury of years of work, refinement and debate. It had to perform battlefield surgery.
A key reason so many businesses were able to increase revenues after JobKeeper began was that it was so effective. A smaller scheme, with more requirements and red tape, would have meant fewer workers and business would have got support, leaving the whole economy worse off.
The more carve-outs and exclusions from JobKeeper the less effective it was likely to be. Fine-tuning rules creates uncertainty. It provides scope for gaming (getting around the rules). If we want public programs to have force, they need to be simple.

The real choice in March 2020 was JobKeeper as it was or no JobKeeper at all.

We saved the patient

In early March 2020 the Australian economy was critically ill .

Doctors Josh Frydenberg (Treasurer) and Steven Kennedy (Treasury Secretary) saved the patient. That’s what matters.

Did they use ECG machines, blood bags, gauze and stitches? You bet.

Did it cost economic resources? Probably, although had the worst had happened even more resources might have been used.

Insurance can look wasteful after the fact, but that doesn’t make it unwise.

I am glad they erred on the side of too many stitches rather than too few.

They provided the only thing that can really help in times of extreme uncertainty, which is certainty.

Richard Holden, Professor of Economics, UNSW

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Australia: Coronavirus Update

Posted on October 13, 2021 by particularkev

Vital Signs: we’re doing well despite Delta, but 3 major economic challenges loom

Posted on October 5, 2021 by particularkev

Richard Holden, UNSWThis week the Organisation for Economic Co-operation and Development published its first “Economic Survey of Australia” since 2018.

It gives Australia good marks for a remarkably good economic response to the COVID pandemic, but warns of the importance of not shirking reforms needed for long-term prosperity.

The Reserve Bank of Australia’s governor, Philip Lowe, also addressed Australia’s recovery this week, in a speech to the Anika Foundation, which funds research into adolescent depression and suicide. Lowe has made a speech annually since 2017 to help raise funds for the foundation, as his predecessor Glenn Stevens also did.

Lowe was upbeat about Australia’s recovery from the pandemic, and also had important observations about Australia’s economic outlook.

He emphasised the central bank would not be lifting interest rates to curtail the latest spike in house prices. The OECD report warns the Australian government relies too much on income taxes for revenue. It also argues forcefully for the significant economic benefits in Australia doing more to reduce carbon emissions.

Taken together, these two assessments point to the outstanding job done in managing the economic recovery.

But they also tell us we will have economic problems down the road if three big, structural reform areas — housing affordability, the tax mix, and decarbonisation — are not addressed.

Recovery signposts

In his speech on Tuesday, Lowe painted a helpful picture of the path of Australia’s recovery before the Delta outbreak — with the unemployment rate hitting a 20-year low and GDP growth recouping all its 2020 losses.

At the end of the June quarter, domestic final demand was more than 3% above its pre-pandemic level. GDP was up close to 10% for the previous 12 months.

Australia’s gross domestic product, seasonally adjusted

The recovery of the labour market was even more impressive. As Lowe put it:

In June, the employment-to-population ratio reached a record high of 63% and the unemployment rate fell to 4.9%, the lowest it had been in more than a decade.

The momentum in the labour market was so strong that in July the unemployment rate dropped to 4.6%, despite Delta-related lockdowns in greater Sydney.

Australia’s unemployment rate, seasonally adjusted

Delta thoughts

Lowe went on to discuss the economic hit of Delta.

Of course, how big that hit is depends on vaccination rates and how safely NSW and Victoria reopen. At a time when there’s a fair bit of discussion of best-case scenarios, Lowe warned of grimmer possibilities, warning of the possibility of:

further significant restrictions on activity […] in response to new outbreaks of Delta, the emergence of a new strain of COVID-19 or a decline in the potency of the current vaccines.

What Lowe hinted at, but didn’t say, was that, absent the Delta outbreak in Australia, the recovery would have continued to drive GDP up and unemployment down.

“On the economy,” Lowe said, “our central message is that the Delta outbreak has delayed – but not derailed – the recovery of the Australian economy. If that turns out to be correct then unemployment could fall below 4% by early 2023 — though how far below remains to be seen.

It’s worth remembering that had the federal government not bungled its vaccine buying and roll-out strategy, Australia might have avoided the current economic pain.

Finally, Lowe was emphatic the central bank would not be raising interest rates to “cool the property market”:

I want to be clear that this is not on our agenda. While it is true that higher interest rates would, all else equal, see lower housing prices, they would also mean fewer jobs and lower wages growth. This is a poor trade-off in the current circumstances.

That’s Lowe-speak for: “Read my lips — no interest rate hikes until 2024.”

OECD’s report card

The hefty OECD report (about 130 pages) concurs with Lowe’s view on strength of Australia’s pandemic recovery. It essentially congratulates the government for its response, noting “fiscal policy has responded with unprecedented force”.

OECD Economic Surveys: Australia, 2021 report cover — OECD Economic Surveys: Australia, 2021.
OECD

But it also notes the low rate of Australia’s goods and services tax (GST) compared to consumption taxes in other countries, leaving the federal government (and thereby state and territory governments) reliant on personal income taxes.

The report observes that GST revenue as a share of total taxation has been falling — from 15.4% in 2003-04 to 14.1% in 2020-21. It suggests increasing the rate of GST would lead to a more efficient tax mix.

This puts both side of politics squarely on notice that serious tax reform needs to be on the agenda soon.

The OECD report also emphasises the importance of the Australian economy decarbonising more rapidly. This is another big policy reform on which the government has show little inclination to take stronger steps.

Common threads

So the RBA and OECD both point to Australia’s strong pandemic recovery, driven in large part by the fiscal force of programs such as JobKeeper and JobSeeker.

The Delta outbreaks have put a serious dent in this recovery. But there is reason to believe the recovery will be back on track by early 2022. In the longer term, though, there will have to be a reckoning about major structural reforms.

By 2050 we will need to have a largely decarbonised economy. We are also going to need to have an improved tax mix to drive innovation. And sooner rather than later the housing affordability crisis must be addressed.

Richard Holden, Professor of Economics, UNSW

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Why pushing for an economic ‘alliance’ with the US to counter Chinese coercion would be a mistake

Posted on September 14, 2021 by particularkev

James Laurenceson, University of Technology SydneyThe Australian government desperately hopes this week’s AUSMIN meetings between Australian and US officials will see greater practical American support being delivered in the face of ongoing trade strikes by China.

Reports confirm that measures to combat Chinese economic coercion will be discussed at the meetings between Foreign Minister Marise Payne, Defence Minister Peter Dutton and their American counterparts.

This desire is readily understood: China’s US$14.7 trillion (A$20 trillion) economy towers over Australia’s at $US1.3 trillion (A$1.7 trillion). And since May 2020, China has blocked or disrupted around a dozen Australian exports, including beef, wine, barley and coal. Previously, sales of these goods to China had been worth more than A$20 billion per year.

Yet, there is good reason to question whether repurposing the ANZUS security alliance to tackle economic issues — and working ever more closely with Washington on initiatives aimed at Beijing — represents a coherent strategy for Canberra to get what it wants.

In 2017, the leading Australian foreign policy practitioner, Allan Gyngell, wrote that the animating force behind Australia’s foreign policy has long been a “fear of abandonment” by a “great and powerful friend” – first the United Kingdom, and since the ANZUS treaty was signed in 1951, the US.

The US has consistently signalled its support for Australia in its trade dispute with China — at least, rhetorically.

Late last year, Jake Sullivan, the new national security adviser in the Biden administration, declared the US stood “shoulder to shoulder” with Australia.

Then, in March, Kurt Campbell, President Joe Biden’s “Indo-Pacific czar”, assured Australian media the US was “not going to leave Australia alone on the field”. This message was repeated in May by Secretary of State Antony Blinken.

Yet, when Trade Minister Dan Tehan went to Washington in July, he received a more tepid message regarding Australia’s stoush with China.

Katherine Tai, the US trade representative, was only prepared to say the US is “closely monitoring the trade situation between Australia and China” and she “welcomed continuing senior-level discussion”.

The US is not always a reliable partner

What has been particularly jarring isn’t just that the Biden administration has stopped at rhetoric, without offering any material support to Canberra. Rather, it has persisted with choices that actively hurt Australia.

One example is a continuation of the tariffs the Trump administration unilaterally imposed on Chinese imports, which were subsequently assessed by the World Trade Organisation as being inconsistent with international rules.

The US then appealed the decision, which effectively ended China’s legal challenge to the WTO. This was because the Obama, Trump and Biden administrations have blocked the appointment of new judges to the WTO’s appeals body as the terms of serving judges expired.

As a result, the body was left completely paralysed in November 2020. Last month, the US rejected a proposal from 121 other WTO members to have it restored.

Lacking the sheer power of the US or China, Australia relies on global adherence to WTO rules to protect its trade interests. But the US actions mean the rules can no longer be enforced.

Another example is Tai’s insistence in February that China “needs to deliver” on the bilateral trade deal that Washington pressured Beijing into signing in January 2020.

This granted American producers favourable access to the Chinese market compared with their Australian competitors. It also served as another demonstration to China that big countries are able to use their power to coerce others.

Australia still likely to double down on US support

That US support for Australia hasn’t gone beyond rhetoric is in a sense not surprising. To do so would involve a political or economic cost to the US. The bilateral trade deal it struck with China, for example, benefits American producers.

But as Gyngell’s analysis suggests, tepid US support to date is more likely to prompt Australia to double down on its efforts to seek more US help.

Addressing the Australian American Leadership Dialogue in August, Prime Minister Scott Morrison said that in view of China’s economic coercion, he believed “bilateral strategic cooperation must extend to economic matters”.

He proposed a “regular strategic economic dialogue” — an extension of AUSMIN talks that cover defence and foreign affairs – between key senior US and Australian economic and trade officials.

The American response to the proposal was reportedly “non-committal”.

Nonetheless, a new report commissioned by the United States Studies Centre at the University of Sydney backed Morrison’s call and advocated an alliance response to China’s trade strikes on Australia.

Reasons to be concerned about an economic ‘alliance’

There’s nothing wrong with an economic dialogue with Washington. But there’s two important considerations for Canberra to reflect on.

First, the pain that Beijing has been able to inflict on the Australian economy by disrupting exports has been limited.

A new analysis by the Australia-China Relations Institute looked at 12 goods that were disrupted by China’s economic coercive actions — everything from barley to rock lobster. And it found that for nine of those 12 goods, the cost incurred by Australian exporters has been less than 10% of the total export value.

The analysis also found that in the first half of 2021, the value of Australia’s overall goods exports to China was actually 37% higher than the previous record set in 2019.

What this means is that China’s trade strikes are nowhere close to being an existential crisis. The Australian economy can weather the storm, with or without US support.

Second, what Australia wants most is for China to follow global trade rules and for these rules to be updated and extended to cover more activities, like government subsidies for agriculture and fisheries.

But the ANZUS alliance is ill-equipped to deliver on this. It has no legitimacy in setting or enforcing global trade rules. And the US has a poor record of following the existing WTO rules itself.

Further complicating matters, the US has designated China as a “strategic competitor” since 2017.

But as Peter Varghese, Australia’s former chief diplomat noted in June,

that does not automatically make it the strategic competitor of Australia.

The more the idea of an “economic alliance” with the US on par with its security alliance is embraced, the greater the danger of Australia getting bogged down with the US in a “forever war” against its largest trading partner — in this case, spilling treasure rather than blood.

Alternatively, the US might cut another bilateral trade deal with China, leaving Australia on the sidelines again.

If the Australian foreign and defence ministers emerge from this week’s AUSMIN meetings empty-handed on the economic front, the public might, in time, consider itself lucky.

James Laurenceson, Director and Professor, Australia-China Relations Institute (ACRI), University of Technology Sydney

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Economic Emergency in Sri Lanka

Posted on September 12, 2021 by particularkev

Frydenberg’s directions to ASIC throw the banking royal commission under a bus

Posted on August 29, 2021 by particularkev

Andrew Schmulow, University of WollongongFor Australia’s habitually-abused financial consumers it’s Back to the Future (minus the DeLorean).

Treasurer Josh Frydenberg appears to have thrown the most important findings of the banking royal commission under a bus, in glorious double-speak.

On Thursday he issued a direction to the Australian Securities and Investments Commission through what is known as a statement of expectations.

It is very different from the previous such statement, issued in 2018.

This one includes an entirely new clause, placed right at the top.

The government expects ASIC to:

identify and pursue opportunities to contribute to the government’s economic goals, including supporting Australia’s economic recovery from the COVID pandemic.

It’s an odd role for a corporate cop, on its face inconsistent with the way ASIC itself describes its function in the “our role” tab on its homepage.

Perhaps not yet updated to take account of the guidelines, ASIC’s description says it is a regulator whose job is to “take whatever action we can, and which is necessary, to enforce and give effect to the law”.

From ‘why not litigate’…

It’s how the royal commission saw ASIC’s role. In his final report, Commissioner Kenneth Hayne was scathing about how ASIC carried out those duties, saying it was too ready to negotiate, and not keen enough to litigate.

Financial services entities are not ASIC’s ‘clients’. ASIC does not perform its functions as a service to those entities. And it is well-established that ‘an unconditional preference for negotiated compliance renders an agency susceptible to capture’.

Negotiation and persuasion, without enforcement, all too readily leads to the perception that compliance is voluntary. It is not.

Hayne said the first question ASIC should ask whenever misconduct was identified was “why not litigate?”.

Frydenberg’s new statement of expectations turns that on its head.

…to ‘why not capitulate’

Rather than “why not litigate,” it reads as “why not capitulate” — justified by the need to identify opportunities to contribute to Australia’s economic recovery.

The statement says the government expects ASIC to “act independently” but also says it should “consult with the government and treasury in exercising its policy-related functions” — a requirement not previously expressed in those terms.

It should “minimise regulatory burdens” (including presumably those that require regulated firms to act in the best interest of their customers).

It should ensure any guidance it offers to financial service providers is not “unduly prescriptive”.

The banks have not earned leniency

Granted, these are conditions that could be interpreted positively if ASIC was charged with supervising an industry that had demonstrated its trustworthiness and its commitment to putting its customers first.

Royal Commissioner Kenneth Hayne believed the banks had not earned out trust.
AAP

But after the evidence that was ventilated before the Hayne Royal Commission no one – not even the Australian Banking Association makes such a claim.

Indeed, the damage done by more than a decade of financial industry misconduct, fraud, criminality and venality, committed on an industrial scale, is yet to be fully quantified.

Colleagues at the University of Melbourne estimate the full cost at north of A$200 billion, affecting approximately 54% of the population.

Frydenberg’s solution appears to be to put the needs of industry first. Separately, he is trying to scrap responsible lending laws.

From somewhere, to nowhere

What will the upshot be of a newly enfeebled ASIC? In light of the demonstrable failure of banks, super funds and insurers to act with integrity after the royal commission, the upshot will be more of the same.

Indeed, as reported in The Klaxon in November, the almost one million customers in Westpac-BT’s “retirement wrap” umbrella fund had been gouged as much as $8 billion over the past decade, thanks to exorbitant fees.

Between mid-2018 and mid-2020 returns to members were close to zero (0.1%).

According to Australian Prudential Regulation Authority data, had the performance of the Westpac funds been merely average, its customers would have been $5 billion better off.

The matter was reported to ASIC on November 23 last year. All ASIC has done since is “review” the situation. In that time fund members might have lost a further $1.5 billion relative to the industry average.

A better way to support a post-COVID economic recovery would be to give customers confidence that the laws meant to protect them were being properly enforced. It isn’t the road the treasurer has taken.

Andrew Schmulow, Senior Lecturer, Faculty of Law, University of Wollongong

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Coronavirus Update: Australia

Posted on August 10, 2021 by particularkev

Paying Australians $300 to get vaccinated would be value for money

Posted on August 8, 2021 by particularkev

Peter Martin, Crawford School of Public Policy, Australian National UniversityI reckon Albo’s on the right track. The opposition leader wants to pay A$300 to every Australian who is fully vaccinated by December 1.

The Grattan Institute is on a similar theme. It has proposed a $10 million per week lottery, paying out ten $1 million prizes per week from Melbourne Cup day. One vaccination gets you get one ticket. Two gets you two tickets.

The costs are tiny compared to what’s at stake. Treasury modelling released on Tuesday puts the cost of Australia-wide lockdown at $3.2 billion per week.

Paying people to get vaccinated fits the government’s criteria of a response that’s “temporary, targeted and proportionate”.

And the published research on small payments shows they are extraordinarily effective, often more effective than big ones.

A few years back, Ulrike Malmendier and Klaus Schmidt of US National Bureau of Economic Research discovered that a small gift persuaded the subject of an experiment to award contracts to one of two fictional companies 68% of the time instead of the expected 50%.

Small payments can be more effective than big ones

A gift three times as big cut that response to 50%, which was no better than if there had been no gift at all.

The effect of small payments to pregnant British smokers has been dramatic.

Offered £50 in vouchers for setting a quit date, plus £50 if carbon monoxide tests confirmed cessation after four weeks, £100 after 12 weeks and £200 in late pregnancy in addition to the counselling and free nicotine replacement therapy given to the other pregnant smokers, those offered the payment were more than twice as likely to quit — 22.5% compared with 8.6%.

Never mind that these small sums ought to have made no financial sense.

The gifts were minuscule compared with the money the recipients would have saved anyway by not smoking, yet they worked so well that the researchers estimated the cost of the lives saved at just £482 per quality-adjusted year.

Around 5,000 British miscarriages each year are attributable to smoking during pregnancy. The participants randomly assigned the offer of a payment not to smoke gave birth to babies that were on average 20 grams heavier.

The incentives can be even smaller.

Mai Frandsen at the University of Tasmania has trialled offering smokers half as much — a A$10 voucher on signing up, then $50 per checkup in addition to support from a pharmacist. The results are encouraging.

Lotteries are cheaper still. The Grattan Institute’s suggestion of a $10 million per week payout sounds like a lot, but it isn’t when divided by Australia’s population.

A preliminary analysis of Ohio’s Vax-a-Million lottery found it increased takeup by 50,000-80,000 in its first two weeks at a cost of US$85 per dose.

Beer, doughnuts, dope

Other incentives offered with apparent success in the US include free beer, donuts and (in Washington state) free cannabis.

They needn’t work for everyone. A survey conducted by the Melbourne Institute in June found that of those who were willing to get vaccinated but hadn’t got around to it, 54% would respond to a cash incentive.

Of those who weren’t willing or weren’t sure, only 10% would respond to cash.

If you were paid a cash incentive, would you get vaccinated as soon as possible?

Melbourne Institute Pulse of the Nation survey

But the important thing about vaccination is that not everyone needs to do it.

The Grattan Institute believes 80% of the population needs to be vaccinated before we can reopen borders.

The national cabinet has adopted a lower target: 80% of Australians over 16, which is 65% of the population.

Vaccination expert Julie Leask says when it comes to child vaccines, most non-vaccinating parents are simply “trying to get on with the job of parenting”. If it’s made easy for them, they’ll do it.

There’s not a lot to be gained by trying to reach these who actually don’t want to be vaccinated. Try too hard, and you’ll get their backs up.

The tragedy of the government’s COVID vaccine rollout (aside from the difficulties with assuring supply) is that the government hasn’t made it easy.

Vaccination ought to be easy

The government could have made it easy. When it sought advice last year from departments including the treasury, it was told to do what’s done for the flu vaccine — to distribute it through employers and pharmacies as well as general practitioners, so as to make it almost automatic.

The best part of a year later, it’s a view the prime minister is coming round to. Most of us don’t go to the doctor very often — it’s out of our way.

For a government that came to office promising to slash red tape
for business and offered businesses incentives to invest, this government appears not to have fully grasped the importance of red tape and incentives when it comes to health.

It might yet. Prime Minister Scott Morrison said yesterday he had investigated something along the lines put forward by Albanese. General Frewen, in charge of the COVID taskforce, said it wasn’t needed “right now”.

When the time comes, if we remain under-vaccinated, Morrison can reach for it.

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Top economists say cutting immigration is no way to boost wages

Posted on August 4, 2021 by particularkev

Peter Martin, Crawford School of Public Policy, Australian National UniversityAustralia’s top economists have overwhelmingly rejected cuts to either permanent or temporary migration as a means of restoring lost wage growth.

The 56 leading economists polled by the Economic Society and The Conversation include a former head of the Fair Pay Commission and a former expert member of the Fair Work Commission’s minimum wage panel.

Among the experts, selected by their peers, are specialists in economic modelling and the economics of labour markets from both the private and public sectors.

All but five rejected cuts in temporary migration as a means of boosting wage growth. All but three rejected cuts in permanent migration.

The results put the economists at odds with Reserve Bank Governor Philip Lowe, who last month drew a link between temporary migration and weak wage growth saying employers had been using overseas hires to fill gaps that would have been filled by locals, diluting “upward pressure on wages in these hotspots”. He said this might have spilled over to rest of the labour market.

Cutting temporary and cutting permanent migration were the first two of ten options for boosting wage growth presented to the panel of economists. The panel rated them third last and second last. Only “holding back growth in female and older worker participation” was marked down more.

Each economist was asked to pick three of the ten options. The most popular, picked by 78.2%, was measures to boost productivity growth. The next most popular, picked by 50.9%, was measures to boost business investment.

Michael Keane of The University of NSW said the idea that population growth and increased labour supply were constraining wage growth was “so naive as to not really be worthy of comment”.

Consultant Rana Roy said only a “cultivated amnesia” could ignore the near-uninterrupted growth in real wages in US, industrialised Europe and Australia amid record inbound immigration in the decades after the second world war.

Gabriela D’Souza of the Committee for Economic Development of Australia said the idea owed much to a “one dimensional view of the world” that took account of only the direct impact of immigrants on particular wages and not the impact of their demand for goods and services on a broader range of wages.

Dozens of studies had identified the overall impact as “near zero”.

Productivity ‘almost everything’

Robert Breunig of the Australian National University said immigrants appeared to add to productivity rather than detract from it, meaning slowing down immigration could slow down rather than add to productivity and growth.

Three quarters of the panel nominated productivity growth as the most important precondition for higher wages growth, endorsing the conclusion of Nobel Prize winning economist Paul Krugman that “productivity isn’t everything, but in the long run it is almost everything.”

Krugman famously added that a country’s ability to improve its standard of living
over time depended “almost entirely on its ability to raise its output
per worker”.

Wages growth is way below the Reserve Bank’s +3% target

Total hourly rates of pay excluding bonuses, seasonally adjusted. Change from corresponding quarter of previous year.
ABS Wage Price Index

Ian Harper, a former head of the Howard government’s Fair Pay Commission and a current member of the Reserve Bank board, said that without productivity growth, any boost in wages growth that was delivered was likely to be nominal — matched by inflation — rather than real, delivering higher living standards.

One of the best tools for lifting production per worker was business investment.

One of the five economists who thought immigration hurt wages growth, Macquarie University’s Geoffrey Kingston, said it seemed to do it by thinning investment per worker. In the 1980s, under Prime Minister Bob Hawke, increased immigration helped push down real wages for five years in a row.

Several of those surveyed said wage growth needed investment in more than machines. Griffith University’s Fabrizio Carmignani said what also mattered was investment in “human capital” via education and research and development.

Adrian Blundell-Wignall, a former division chief at the Organisation for Economic Co-operation and Development, said reforming the education system and getting rid of elitism had to be part of the plan.

“That the best predictor of how well you do at school is how rich your parents are and where they went to school is a national tragedy,” he said. “The entitlement and club economy that comes with this permeates politics, business, and who gets the best jobs after completing school.”

Former Rudd and Gillard government minister Craig Emerson said while measures to boost productivity growth were essential, even if implemented soon, they would take years to flow through into higher wages.

It’s how you divide the pie

Saul Eslake said whether or not higher productivity growth actually delivered higher real wages would depend on the division of the fruits of that growth between wages and profits.

John Quiggin said nearly every reform of Australia’s industrial relations system since 1975 had acted to reduce the bargaining power of unions. All ought to be reviewed with a “presumption in favour of repeal”.

Mala Raghavan of the University of Tasmania said wage growth had become uneven. Wages for a small number of managers had soared while wages for others — especially casual workers — had barely moved.

The Australian National University’s Emily Lancsar saw a triple benefit from reforming the industrial relations system to boost union bargaining power: it would increase wages directly, it would put money that would have been paid out as profits in the hands of people likely to spend it, and the increases would flow through to workers not on awards and not represented by unions.

Labour market specialist Jeff Borland added that there was a case for strengthening the ability of unions to obtain gender pay equity in female-dominated occupations.

None of those surveyed were optimistic about the prospect of quickly lifting wages growth. The Reserve Bank said in July it wasn’t planning to lift interest rates until aggregate growth exceeded 3%.

Detailed responses:

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Now that Australia’s inflation rate is 3.8%, is it time to worry?

Posted on August 4, 2021 by particularkev

John Hawkins, University of CanberraSuddenly, Australia’s annual inflation rate is 3.8%, having jumped from 1.1% for the twelve months to March.

The June quarter jump follows a jump in the United States to 5.4% and a jump in New Zealand to 3.3%, sparking a debate between leading pundits such as former US treasury secretary Larry Summers and Nobel Prize winner Paul Krugman about whether high inflation is on the way back, after years of playing dead.

Annual inflation, Australia

The best advice is not to worry. Most of the jump is only temporary, the result of several one-offs.

As the Reserve Bank told us back in May, a main cause is that in the depths of COVID lockdowns last year, the government heavily subsidised child care, pushing the effective price to near zero.

With removal of those subsidies the price has bounced back. This is a one-off — it can’t be repeated.

Reasons to not worry

Petrol prices also collapsed as cities locked down last year, and have since returned to pre-COVID levels. This is another one-off that won’t be repeated.

There were also big jumps in the prices of some fruit and some vegetables due to a shortage of pickers and heavy rainfall. They are also best seen as one-offs.

The “trimmed mean” measure of so-called underlying inflation used by the Reserve Bank to see through transient influences was only 1.6%. It’s a better guide to what is going on.

This also true in other countries. The Bank for International Settlements concluded this month that a common thread in recent increases in inflation was that they were “likely to be temporary”.

The Reserve Bank is expecting inflation back below 2% by the end of the year. The bank forecasts consumer prices to rise by 1.5% through 2022.

Most economists broadly agree. The average forecast from The Conversation’s panel was an inflation rate of 2.1% in 2022.

What about the traders in financial markets, whose pay depends on trying to guess inflation right?

The traders’ average forecast can be derived from what they will pay for inflation-indexed compared to non-indexed bonds.

Over the next ten years, they expect inflation to average 2%.

But isn’t too much money being printed?

Yes, there have indeed been such claims, often by people trying to talk up the value of cryptocurrencies through internet memes.

It is true that as the Reserve Bank sought to steady the economy last year, there was a period of rapid monetary growth. In times of uncertainty, people tend to want to hoard some money.

But the same thing happened during the global financial crisis in 2008. It didn’t end up leading to high inflation then. It is unlikely to do so now.

Concerns have also been expressed that central banks have been buying too many government bonds — so-called “quantitative easing”. These fears were expressed internationally during the global financial crisis. They proved unfounded.

What else might push up inflation?

There are some longer-run structural changes. After the global financial crisis, the effective supply of workers in the global economy grew due to demographic factors and the re-engagement of China.

Some of the demographic factors may be reversing, but the effect will be gradual.

It is also true that many economies, including Australia’s, rebounded from last year’s COVID lockdowns faster than expected. This has led some commentators to talk about overheating.

But now the emergence of the more contagious Delta strain has seen a new round of lockdowns. The Australian economy is likely to contract in the September quarter, making our recovery look W-shaped rather than V-shaped as it did.

A big rise in inflation is unlikely unless wages grow strongly. There is no sign of this. Australia’s wage price index is climbing by just 1.5%.

But what if the experts are wrong?

Contrary to some claims, the Reserve Bank has not promised to keep interest rates on hold at 0.1% until 2024.

As the bank’s governor has made clear, if inflation accelerates into its target band it will raise interest rates earlier.

Since the Reserve Bank introduced its 2-3% target, inflation has averaged 2.4%. There is no reason to think it won’t continue to act to keep it moderate.

But if I still fear inflation, what should I do?

You should look for a good “inflation hedge”, an asset that will increase in price with inflation.

It is possible to buy indexed government bonds.

Rents and dividends also tend to rise with inflation, meaning houses and shares have proved reasonable inflation hedges in the past.

Assets with no returns, such as gold and cryptocurrencies, are less reliable. The price of Bitcoin has more than halved in two of the past seven years, so beware.

John Hawkins, Senior Lecturer, Canberra School of Politics, Economics and Society and NATSEM, University of Canberra

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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The US is not always a reliable partner

Australia still likely to double down on US support

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From ‘why not litigate’…

…to ‘why not capitulate’

The banks have not earned leniency

From somewhere, to nowhere

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Small payments can be more effective than big ones

Beer, doughnuts, dope

Vaccination ought to be easy

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But isn’t too much money being printed?

What else might push up inflation?

But what if the experts are wrong?

But if I still fear inflation, what should I do?

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